5 reasons why a User-Centric business model always wins

A few posts drew my attention this weekend. first there was Chris Anderson talking about the economics of giving it away. It seems to me that Chris is changing his tone of voice in FREE. Whereas he often has focused on the zero cost distribution of FREE, he now talks about the revenue side of things. He notes that in a market where both venture capital and advertisement investments dry up startups need to make real money. This quote says it all:

What about those companies trying to build a business on the Web? In the old days (that would be until September of last year) the model was pretty simple. 1. Have a great idea. 2. Raise money to bring it to market, ideally free to reach the largest possible market. 3. If it proves popular, raise more money to scale it up. 4. Repeat until you’re bought by a bigger company.

Now steps 2 through 4 are no longer available. So Web startups are having to do the unthinkable: come up with a business model that brings in real money while they’re still young.

Fred Wilson follows up with a post about the need to not only look at revenues, but also at costs. He writes:

Chris goes on to suggest that Internet entrepreneurs are going to have to get people to step up and pay for something instead of just giving everything away for free because advertising isn’t going to foot the bill for every company. That may well be true and we are certainly thinking that way for most, if not all, of our portfolio companies. But Chris’s examples, particularly Facebook and Digg, are examples of companies that might benefit from looking at the cost side of the profit equation at some point (maybe not yet).

And then there is Facebook, with Mark Zuckerberg who feels he has found the pot of gold at the end of the rainbow. In an NY Times article, ironically entitled “Networking site cashes in on friends” we can read about his strategy:

Facebook is planning to exploit the vast amount of personal information it holds on its 150m members by creating one of the world’s largest market research databases.

In an attempt to finally monetise the social networking site, once valued at $15bn (£10.4bn), it will soon allow multinational companies to selectively target its members in order to research the appeal of new products. Companies will be able to pose questions to specially selected members based on such intimate details as whether they are single or married and even whether they are gay or straight.

I feel we may finally have reached a tipping point in thinking. While the FREE advertisement based business model might have given us lots of good things (free services), it comes with many downsides and basically holds web evolution back:

1. It leads to focus on network value instead of user value. In other words, the network and growth are more important than providing individual users value
2. It leads to walled gardens. If you have to make money with advertisement, and your business is not search, then it is imperative that you keep your customers locked in. The phrase locked in says it all. Instead of freedom we contain our users. Get him into the service and then never let him out.
3. It leads to destination sites, instead of user centric services. For advertisement we need traffic and eyeballs. It is therefore important to get your users to gather together in one place.

I feel Facebook still isn’t convinced. They choose yet another indirect business model. Instead of focus on user value, they will now try to exploit user data towards brands. You get a service for free, but in return we sell you, your friends, and your data to other brands. Possibly the largest marketing database in the world. I’m not looking at any moral aspects of such a deal, but think about the inefficiency for a second. There is a clear misalignment between what the Facebook user perceives as value received from Facebook versus the value Facebook executives are trying to exploit. And it is this misalignment that makes it so hard for Facebook to make enough revenues. They have huge operational costs with servers and a large organisation. And they can’t back that with advertisement money. My prediction is that it will be quite hard to monetize the user database the way they are thinking about it now. The reason for this remains simple. A Facebook user is there because of interaction with friends. That’s it. Having a good time online doesn’t match any advertisement or marketing goal. If they want to pull this off, they better start lowering their operational costs big time.

I believe a User Centric business model is more powerful in the end. Focus on user value and monetize that value. It is the simplest and clearest business model there is.  It is a model that comes with several advantages:

1. With one specific variant, Freemium, you can use the best of FREE (near zero cost distribution) while at the same time monetize on user value
2. You will be forced to keep your operational costs to a minimum as you do not want your customers to pay for the overhead you are creating to deliver value
3. If your main focus is user value, you will build user centric services instead of network value services. Everyone will benefit from that. It will lead to open systems, cross platform integration and service oriented business.
4. It forces you to constantly innovate your concept of user value. You want customers to stay with you because of the trust and value you provide, instead of locking them in.  As a result constant user centric innovation will keep competition out and your customer happy
5. It is fun to engage with happy customers. Do not underestimate this aspect. I can still get very excited when I read the “300.000 paying customers of SmugMug”. SmugMug doesn’t really have customers, they have fans!

Let’s hope more services will follow that path. it will do the user and the web a lot of good. A User-Centric web is to prefer over any other type of network.

The best business models focus on user value

Fred Wilson just wrote a post called Free versus Paid. In it he says:

It’s much better, in my opinion, to go with the freemium model, give a version of the service away for free to all comers, get a lot of users, get good market feedback, then develop a premium version of the product/service for sale to enterprise customers. If your free version is popular with a lot of users, your customer base is the target for the upsell and you might be able to live without an expensive sales force initially. And, of course, keep your costs really low until you start to get revenues.

In summary, freemium is far from dead, in fact it may be the business model de rigueur.

Fred’s look on Freemium works in the consumer market too.

In my opinion FREE work best when it is not mixed with advertisement, especially if you are in the social media or social networking business. FREE is just a cleverly concealed trap. It doesn’t focus on user value. It focuses on having a large user base and ensuring the value is monetized on size. It’s an indirect business model that by default makes it hard for the service provider to provide real user value to the user. It might give a service provider distribution because the service is free. But the advantage of distribution is diminished by the lack of revenues and the negative impact advertisements have on the user experience.

“Hey, you get a free service so you’ll have to put up with advertisement” somehow doesn’t feel right as a business model. And if you do the math then you will find that few companies make lots of money in on-line advertisement. Google takes more than 75% because they alone have a free ads based model that actually provides the user direct value. MySpace and Facebook take a few % and the rest is spread as leftovers for the thousands of companies running the same business model.

I prefer a business model where the user gets value, and you monetize on that value. It’s the cleanest and best business model there is. Ask yourself this. Would you prefer a few hundred thousand enthusiastic customers that pay for the value that they receive, or would you prefer millions of users that get a free service, aren’t really getting the value they deserve and end up with advertisement too because you need to make a living? Investors and entrepreneurs wanting to rule the world or become a “new”  Google or Facebook, will use the second model. anyone else should focus on the first.

I feel Freemium has a good chance of revenue creation. It focuses on user value, creating a community of enthusiastic users, and eventually adds more value to that community by delivering paid premium services. It is not the easy road to success. It may not easily scale to millions of users or “sound” good to investors. But maybe times are changing now. Maybe investors and entrepreneurs will step away from the default and start experimenting with new business models.

Right now the basic business model is to grow as fast as you can (focus on size and provide the service for free), advertise to give “old media” the feeling that something important is happening out there. Finally get some “old school” media company to pay way too much money to take over the company, which then allows them to find out that earning advertisement revenues is something very few companies are able to get right. It’s a lose-lose scenario. The user loses because the focus of the business model is on growth instead of user value, and the sucker that ends up paying for it loses because it will never generate enough revenues.

The Free Ads based business model has another problem. As if focuses on growth it doesn’t answer the most important question technology needs to answer for any user: “what does it do for me”? I call that the First Use experience. It’s dead simple to understand, but incredibly difficult to get right.

First use is about creating the best possible user experience when you deploy your service for the first time amongst your target users. First use is about answering the question,”Is a user willing to put in the effort to learn about this new technology and incorporate it in his current habits”?  The answer in any case is that willingness is related to either solving a problem or creating another type of value for the user. If this isn’t obvious from the start, then the user is not committed to put in the effort of integrating this technology into his life.

A startup that uses a business model that focuses entirely on monetization of user value needs to address the First Use question. It might not get it right immediately, but through interaction with its user community it will get there in the end. I hope that the FREE advertisement based business model is slowly replaced by business models that focus on user value. Freemium is just one way of doing that. But it will help us build a User-Centric web.

The phenomenal power of social media

I was going to write about an interesting topic today (will save that for another day) until I was reading through some blog posts and read a couple by Fred Wilson this morning. According to Steven Hodson Fred seems to be in a web 2.0 midlife crisis. Fred talked openly about not being to write a blog post every day anymore (although he still seems at it) because of a lack of things to say. BTW, my mom always told me that if I didn’t have anything useful to say I might as well be quiet and listen for a while

He notes that the major web 2.0 news sources such as TechCrunch, TechMeme, etc. do not provide him much inspiration.

As technology blogging has become defined by blogs like Techcrunch, Gigaom, VentureBeat, Valleywag, PaidContent, AlleyInsider, and many others that are quickly becoming news organizations optimizing around scoops and driving readership, I am feeling that we’ve lost something, or at least we need to look elsewhere for that magic that was existent back in the first half of this decade.

And continues with:

Who knows if what I want exists or can exist. But I want techmeme for inspiration. I want a place I can go every day and get inspired by real people. It hasn’t happened for me in many years in traditional media and honestly it’s happening for me less and less these day in online/social media.

It is interesting to see the direction Fred is taking this. He is now turning his attention to fields outside of web 2.0. He isn’t bored with web 2.0 but wonders how its massive globalization power can help solve real-world problems, inspired by an article written by Umair Haque:

So I am not bored by the web. I do want to figure out how to use the web to answer some of Umair’s questions, how do we:

Organize the world’s hunger.
Organize the world’s energy.
Organize the world’s thirst.
Organize the world’s health.
Organize the world’s freedom.
Organize the world’s finance.
Organize the world’s education.

I really like this train of thoughts Fred is going through right now. We could question the ability of web technology to aid in resolving some of the worlds toughest problems. Web technology might not directly solve hunger or thirst problems. But web technology does bring us the ability to organise the potential to tackle these issues. Social media allow us to interact anywhere. Given the right content and the right distribution could we not organise a mob of creative, intelligent group of people across the world that would be willing to think of solutions? Not problems, but solutions. it might not be possible to resolve just anything. But there are area’s in which technology could definitely help to bring the necessary potential together.

It would need people that have a deep understanding of the essence of these world problems to ignite such efforts. It seems to me that there are often scarcity, suppression, market, logistics, supply chain, technological and human problems underneath. There is food and water, but it isn’t available in the places that need it mostly. There is technology that can help farmers harvest, but there isn’t money to deploy it. There are medicine that can increase basic health but the industry blocks distribution because it doesn’t make them a buck.

There are some successes to be told. For example, in the 70s manipulation of rice crops (not sure if that is the right terminology here) helped create a much stronger plant, leading to higher rice production. If you now Google “improve rice” you will find many projects working on further improvements. If rice production can be increased it will immediately benefit the poor.

There is Muhammed Yunus, who came with the idea of Microcredits, small loans than helped poor people become self employed again. A project that started in Bangladesh and has found its way to many other countries.

There is also the Cradle to Cradle project, founded by William McDonough and Michael Braungart. They have written a framework of production techniques that are not just efficient, they are essentially waste free. It is an amazing idea, producing waste free. The problem I see with this concept right now is that it takes people of the caliber and expertise of William McDonough and Michael Braungart to accomplish such projects. It is really complex to produce waste free and it needs incredible expertise in fields such as chemistry and technology. But here social media technology can really help. Finding the right expertise. Sharing results and good practices.

I think Fred is right about diving into the capabilities web technology to see if this can help to resolve the real issues in this world. Web technology and social media have brought us unique technological capabilities. It is truly worldwide as Fred points out. It helps us share and improve on current knowledge and expertise. And perhaps most important of all, it can help to find and bring the most creative, smart, enthusiastic people together. And these people are needed to come up with life saving ideas. Ideas that don’t just sound right, but can actually be implemented too.

If Fred or anyone else can help this process going, to let people get together and make the technology work for this world, it would be great. The phenomenal power of Social Media might just be what we need to start organizing such a venture. You can count me in!

The real value of Social media = Interaction

Fred Wilson writes about his vision of social media. He has a very simple definition for it:

every single human being posting their thoughts and experiences in any number of ways to the Internet.

I like it’s simplicity. Fred says he doesn’t have a “grand vision” or a well thought of strategy to invest in social media. I don’t really agree with that. It’s very hard to write a vision down in just one sentence, and Fred did a good job on it. It set me to think what my idea’s are when it comes to social media. For those of you reading this weblog frequently you already know that I spend a lot of time writing about social media. It’s even part of the title of my blog.

Even though I think Fred did a great job, I don’t think I can fully agree with him. In my opinion, for what it is worth, Fred is describing some of the effects that social media will have on people. Already millions of people are posting their thoughts and experiences on the web, and I agree with Fred that most people that join the Internet will likely engage in these activities as well. But the question it doesn’t answer yet is why? Why do we post our thoughts and experiences to a larger audience? Why is it so attractive to express yourself to people you have never seen or heard about? Are we all such creative, well expressing, extrovert people and web technology just helps us doing just that? I don’t think so. But the phenomenon is out there, it seems everyone is affected by it and joining in.

I believe there is another simple answer to this. I can think of only one reason that might fit every person joining the social media era. I believe that underlying this urge for self expression there is a more basic drive. It is interaction! If anything, web technology has brought us the ability to interact at zero cost. Just think about it for a second. Let’s take Fred’s vision to the extreme. Let’s assume the entire world is expressing his thoughts and experiences on the web. Let’s also assume that that is all that happens, we express ourselves but no one is listening. I bet that the phenomenon would die out very quickly. It isn’t the expressing your thoughts what makes social media tick. That is only half of the equation. It is the “social” aspect of it that matters most. The ability to react, to agree or disagree, to build further (as I do now what Fred’s post), the sharing of experiences in order to learn from each other, to have fun, to argue or fight, in other words, it is interaction that matters.

I started writing this weblog a while back with the idea that I learned so much from reading other people’s weblog that I felt I should attempt to return the favor. I thought I might be able to add to the conversation and hopefully get people to think about the things I would write. But the first start wasn’t easy. Just because I express myself in a weblog doesn’t mean people will find me or take the time to read the things I write. It takes time, effort, and most important you need to be passionate about the stuff you write. And as time went on I went from a few readers to more readers, from no comments to a comment on every post. And that is when the fun of writing on a weblog kicks in. It isn’t the writing (although I can get excited if a piece works out well), it’s the interaction!

I’m guessing it’s like that for anyone that is actively involved in social media. The media provide us ways to express ourselves. But the social aspect of it allows us to interact. And that is where the real value of social media lies. Social media = Interaction!

I’ll tell you another thought I have on that. If it is true that social media is about interaction. And it is also true that every individual on the Internet will join this conversation. Then we should also accept the possibility that in a next evolution on the web public interaction will be less important. It is a simple thought really. If you can talk to the whole world it sort of makes you anonymous again (because you can’t grasp the notion of 6 BLN people talking to you). Public interaction will remain a constant factor, but I’m betting that the trend will be to size down and have this conversation in smaller networks. It is one of the reasons why large social networks have such problems opening up. It’s because their business model isn’t made for smaller networks. Their business model is for conquering the world. But that business model will be less important when we evolve the web and open it up. We will need business models that support the User Centric Web. It’s inevitable, so you might as well join in. Not everyone agrees on this thought, but I did get a real good conversation started on it, and that in itself has helped us to think about new possibilities. It also lead to a followup post

I’ll end this with a quote from Factoryjoe. Chris Messina is one hell of a technical dude. But he keeps surprising me with a human behavioral view above all that technology. A must read imo. If you want to understand why Chris compares Facebook to Russian Railroads, then go no further and read his post here, it’s worth it!

That Facebook is attempting to open source it platform, to me, sounds like offering the world a different rail gauge specification for building train tracks. It may be better, it may be slicker, but the flip side is that the Russians used the same tactic to try to keep people from having any kind of competitive advantage over their people or influence over how they did business. You can do the math, but look where it got’em.

Would you be willing to pay for a web 2.0 service that provides value?

The dominant web 2.0 business model is the FREE business model. It comes in many different variants, but the most widely used are the freemium business model (I always thought Fred Wilson came up with that term, but he says it was Jarid Lukin) and the free with ads based business model. With freemium you get a service for fee, but for the real cool features you need to upgrade and pay a subscription. Flickr uses that business model. The free with ads based business model lets you use a service for free, but in return you get advertisement. Facebook is the most obvious example, but many other services use that model as well. For a much more complete overview of the many different forms of the FREE business model I recommend you read the extensive list compiled by Chris Anderson here.

The driving force behind the FREE business model is the (web) technology that enabled us to copy and distribute digital information at almost no cost. Don’t assume something is not valuable just because it’s free. But the effort to copy and distribute have dropped to zero.

Free has a lot of great advantages. It lowers the threshold for a user to try out your service. It lets you distribute easily and helps you create a user community much quicker than with a paid service. Free lets you provide value to a user while the costs for it are paid by someone else, for example an advertiser. Because of this 3-way relationship it becomes easier to distribute your service, making it visible for you potential user groups on all kinds of advertisement networks. And perhaps most important, most entrepreneurs delivers web 2.0 services for free now, so why charge your users for your service?

How does all of this work? On the web there are currently two main value drivers, attention and reputation. Attention is measured in page views, how many people looked at this advertisement, how many clicked on them etc. Reputation is based upon links. The more links the more value, Google Pagerank uses that measure (amongst many others). The on-line FREE business model is often executed in a 3-way relationship. The user, the service provider, and the 3rd party who pays for the costs of the service, in order to get attention.

But FREE comes at a cost too. The sun rises every day for free, but for all the other stuff happening on our planet, someone is paying the bill. In web 2.0 free leads to several related effects which occur due to the way value is calculated right now, attention and reputation.

FREE leads to destination sites with walled gardens

In the FREE business model attention is the most important currency. The focus of the user needs to be on the service. The more attention it gets, the more value is generated. As a result of this a service provider is not likely to let a user leave once he is in. The service is surrounded by large walls ensuring that the user and the data he produces can’t leave the premises. The user needs to go to the service instead of the service coming to him. Attention is measured in pageviews, so if you aren’t there, no value is created. Reputation is also important. That is probably why most web 2.0 services try to attract top tech bloggers on their network. It provides them with credibility for the service.

FREE makes the network more important than the user

Attention is key. You get more attention if you get more users. The focus of most free web services isn’t on user value. It’s on user addition. A service need gazillions of users and if you don’t have at least a few million users on board, you aren’t execution your business model right. But a service that is driven by new users tends to think less about the current user. It isn’t the user that is important, its all of his friends, his social graph, his interactions with others that is important. That is where the value lies. It also leads to API’s, third party development and dilution of the original value proposition of the service. Facebook is an example of that. While the original value of Facebook was to connect to your friends, it has now become a platform that seems to be driven for advertisers and 3^rd party developers. In other words, the network or social graph has become more important than the individual user. I’m not suggesting these services don’t provide the user with value, there has to be some. But the main focus isn’t to improve on that, it’s on user addition.

FREE leads to forced attention on advertisement

FREE can lead to a lot of things (see the overview at the beginning) but it often leads to advertisement. It sounds like a great deal. You get the service for free, and the costs are covered by the advertisers. Although it might work well in some cases I believe that in most cases this type of forced attention doesn’t provide the user or the advertiser any value. The click through rates of advertisement are not that high in social networks. And that is pretty obvious, social networks are for interaction. And when I interact with friends there is simply no room for advertisement. Its trespassing. There is of course one great counterexample to this. Advertisement does work in search. It is what made Google the mightiest company on the web. When I am looking for something advertisement can help. For this very reason Facebook doesn’t perform well on advertisement, while LinkedIn performs much better. Can you spot the difference? The first platform is about interaction, the second is about search, about business. A subtle but in my opinion important difference.

FREE leads to customer lock in instead of customer freedom

If I would have to sum it all up then to me FREE leads to customer lock-in. Instead of setting me free, the business model forces me to come to a destination site, to stay there, to leave my data, to expose my friends to the same mantra. The service isn’t coming to me, I can’t go where I want. FREE locks us in, and often we don’t know about it. I often hear that users don’t care (there are millions of people on Facebook right), but I refuse to believe that. There currently simply isn’t a viable alternative to those FREE walled gardens. If there was and people knew they had a choice, I am betting that a lot would choose a service where the user is more important than the network. A service that is entirely focused on user value and doesn’t enforce walls or attention.

What do you think?

I asked the following question on both Twitter and Friendfeed: “Would you pay for a web service that provides you value?”. It was not the best of questions (too open), but I still got a lot of great responses. The twitter responses were short and to the point. Erwin Blom thought it was a strange question, since he pays for many services (Flickr, Nozbe, Basecamp, Highrise, Mindmeister, Box.net). Many responded that they already pay for services like last.fm, iTunes, Flickr, Dreamhost, Blockbuster. Tokerud would pay for Twitter as much as for a professional Flickr account ($25 a year). MarkDykeman, jcvangent and sndrspk would pay for a web service, but only if it would provide significant value.

On Friendfeed there was a bit more discussion (it allows messages larger than 140 chars). You can find the entire discussion here. Most people are willing to pay for value, but the value needs to be significant. The freemium model seems to dominate thinking here A lot of people also mentioned that once a service with a subscription fee is up, it is likely copied by a free with ads version. Ran has a good point when he says that he would be more demanding if he paid for a service (A twitter outage of a few days would not be acceptable).

Are there possibly viable alternatives to FREE?

Sure there are. Kevin Kelly offers a range of great posts on this subject. I love his 1000 fan post in which he analyzes the long tail and argues that you only need 1000 true fans to make a good living on the web. He later wonders whether or not 1000 fans is enough, but he believes that its possible with a relative small number. If you want to conquer the entire world, you will probably need the FREE approach. But there is a great living to be made that doesn’t involve world domination.

Kevin Kelly provides in a post entitled “Better than Free” 8 generatives to the FREE model, a must read for anyone interested. An summary from his article (but read it, its really good):

Immediacy: Getting a copy of something you want immediately, even though it might be free later. Examples: go to movie theaters to see films on the opening night and pay a premium price for it, access to Beta releases, Hardcover books.

Personalization: A product or service tailored to your personal needs. Examples: A generic version of a concert recording may be free, but if you want a copy that has been tweaked to sound perfect in your particular living room — as if it were preformed in your room — you may be willing to pay a lot.

Interpretation: The content may be free, but the interpretation of it not. Examples As the old joke goes: software, free. The manual, $10,000.

Authenticity: You might be able to grab a key software application for free, but even if you don’t need a manual, you might like to be sure it is bug free, reliable, and warranted. You’ll pay for authenticity. Graphic reproductions such as photographs and lithographs often come with the artist’s stamp of authenticity — a signature — to raise the price of the copy.

Accessibility: Having access to your possession (data for example), tidy, up-to-date, orderly, backed up, provides us value that we are willing to pay for. The fact that most of this material will be available free, if we want to tend it, back it up, keep adding to it, and organize it, will be less and less appealing as time goes on.

Embodiment: The most obvious example. A book may be for free, but a presentation by the author is expensive.

Patronage: Kevin believes that audiences WANT to pay creators. Fans like to reward artists, musicians, authors and the like with the tokens of their appreciation, because it allows them to connect. But they will only pay if it is very easy to do, a reasonable amount, and they feel certain the money will directly benefit the creators.

Findability — Where as the previous generative qualities reside within creative digital works, findability is an asset that occurs at a higher level in the aggregate of many works. A zero price does not help direct attention to a work, and in fact may sometimes hinder it. But no matter what its price, a work has no value unless it is seen; unfound masterpieces are worthless. When there are millions of books, millions of songs, millions of films, millions of applications, millions of everything requesting our attention — and most of it free — being found is valuable.

Conclusion

It is my believe that in general users are always willing to pay for value. If you can find a proposition that provides true value, then a payed business model is to prefer over a FREE model. Why? because it forces you to think in user value. It forces you to provide the user the best experience he can get. It forces you not just to get new users but to keep providing the users you already have with value. And you don’t have to be affraid of a competitor offering the same service for free. You can use the trust and long-term relationship with the customer to innnovate and create new value that your competitors don’t offer. In other words, the business model makes the user and delivering value to this user much more important than the network.

This post has become longer than I expected. Thank you all for the willingness to respond to my question. Let me know what you think. Would you be willing to pay for a web service that provides you value?

It’s about interaction stupid!

Justin Smith has an article up this morning (well for me anyways ) in which he suggests that Facebook isn’t trying to be the biggest content or entertainment platform, but instead tries to dominate as a communications platform. In his words, Facebook wants to “own”communication with your friends”.

Justin is, in my opinion, only half-right about Facebook’s intentions (more on that in a second). Communication is important, more important than anything else.  Last year Tim O’Reilly mentioned a comscore report that showed that people on Facebook spent most of their time browsing heir own or other people’s profiles, followed by interaction with Facebook applications. Shelly Farnham just published research results in which she looked at the success of Facebook applications. Why do some work and others not?

Her research shows that people interact mostly with applications for communication needs. Or as she says it:

In reviewing the dominant types of applications, it is clear that most of the applications are helping users achieve social goals such as improved communication, learning about the self relative to others, finding similar others, improving self-presentation, engaging in social play, and engaging in social exchanges via gifts and media. Despite its shifting demographics, Facebook is still very much a social arena in the private, personal domain, not the professional domain.

I believe in interaction. Communication is just one aspect of interaction. But interaction is what’s most important. It’s what makes us tick so to say. Now back to the article written by Justin. He feels that Facebook wants to own your communication with your friends. While I think he is right about that, I doubt that Facebook is setting that as an end-goal for themselves. Facebook isn’t a communication platform first.

Facebook is a social graph data hogger. Their sole purpose and existence on this web is to own the biggest social graph in the world. If communication gets them that graph, then they will use that. but only as a means to an end. Owning the biggest social graph helps them to maintain their business model. Justin touches the subject a little when he says:

While I hope Facebook can co-exist with and reward developers of communication-oriented Platform applications, I think Facebook is smart to want to own the most important channels used to communicate with your friends. While it may take a while to figure out how to monetize these new communication channels most effectively, people will always stay most engaged with services that provide the most value, and core communication tools are some of the services that can be most enhanced by ownership of the social graph.

Facebook wants to hold the largest walled garden social graph they can get their hands on. It is the main fuel for their business model, serving ads. But I don’t believe in that business model within the context of social networks. And the main reason I don’t believe in it is precisely because of the way people use social networks. They use it for interaction. And advertisers have no purpose or any value in interactions between friends. They aren’t part of the conversation, they are merely trespassing.

The irony in this off course is that Facebook doesn’t really “own” the social graph. The social graph only exists because of the users within that. If it is “owned” by anyone, then it should be owned by the users that create it.

Facebook only gets to see a small part of that graph anyways. I have many friends I communicate with (both on-line and off-line), none of which are on Facebook. While Facebook does have a mind blowing amount of users worldwide, the amount of communication that actually passes through their platform is infinitely small.

Let’s see. According to this site there are currently 1.3 Bln Internet users worldwide. Facebook has some 33Mln users according to Mashable. So some 2,5% of the Internet population is on Facebook, a pretty impressive number I’d say. But there are a few interesting things to note. First of all, I suspect that much of our communication is spread over a lot of different communication channels. We have physical communication, mobile phones with SMS and voice calls, e-mail (probably more than one address), IM, and at least 5-10 different social networks where in 2,5% of the cases Facebook is one of them. So an average person probably has at least 20 different means to communicate.  We probably interact anywhere between 100-1000 times a day over those means (unless you are cut off and isolated from the world around you). Just think of all the e-mails, SMS, IM’s, voice calls, physical conversations you have on a day to day basis. I would argue that less that 5% of our communication goes through social networks. It means that 95% of all communication of those 1.3Bln Internet users worldwide isn’t passing through social networks. Even e-mail, already dead and buried by most web 2.0 evangelists sees way more interaction than all social networks together. So let’s burst this “Facebook want’s to own your communication with your friends” bubble right here and right now. They can’t and will never be able to own that.

Another interesting thing to note is that the Internet growth is dominated by Asia, Africa and Latin America. These are all regions where Facebook is not dominating social networks. I seriously doubt that Facebook will “own” the biggest social graph in the world. Google’s Orkut, for example, is much more popular in these regions.

The thing with any walled garden service is that user’s find ways around that. Where Facebook and other social networks try to lock-in their users, the users simply use other services to get around that wall. It’;s human nature. We like freedom and will always find ways around any old-fashioned web 2.0 walled garden business model.

Facebook won’t “own” my communication with my friends. If they try to do that they will fail.  My interactions with my friends belong to us. Anyone that doesn’t understand that and tries to interfere with that will not provide users with value. And a business model without user value is sure to fail.

If you want to enter this communication arena then you first need to get rid of the destination based business model. If I have to go to Facebook to communicate then Facebook has already lost the fight before it started.  The web entrepreneur that puts me in the center of my communication needs allowing me to communicate any where, any way, any time using the means that fits best will provide me the best value. Owning a social graph or a walled garden isn’t really what matters. Allowing the user to interact any way he wants is what matters. Fred Wilson understands this. Read his post called everything, everywhere. That is where the real value lies. I guess I will say it just one more time. It’s about interaction stupid!

Looking back at 2007 with a few lists of the best of..

It seems everyone is closing off 2007 with all different kinds of lists. I haven’t done that yet, but to make up for it, here are a few of mine:

My own 5 top posts in 2007:

1. De zin en onzin van advertenties in sociale netwerken, an article I wrote (in Dutch) for the largest and most popular Dutch blog Marketingfacts.
2. Counting down the downfall of Facebook as they set to introduce major add play
3. The flaws in web 2.0 and how to correct them
4. 10 ways to improve web 2.0 and move into an era of true interaction
5. Well, this was too close to call, these two posts got an equal number of visits:
   • Dear Yahoo, Microsoft, Google e-mail. Forget about Facebook, start innovating!
   • Following the emotions of millions of people

My top 5 blogs I like best (no particular order):

• Rolf Skyberg
• Doc Searl
• Fred Wilson
• Ze Frank
• Zephoria

These people are smart, understand social networks, business, human behavior, make me laugh, provide me inspiration. If you ask me again tomorrow, I will end up writing a different list

The top 5 video’s from 2007 I like best:

Top 5 presentations of 2007:

What are your top 5 lists for 2007?

The art of becoming successful

Fred Wilson has written 2 excellent posts on his personal success/failure rate as a venture capitalist, and on the reasons why early stage ventures fail. It is good reading material, especially if you are not in the venture capital business yourself. His most important reasons why ventures fail are:

1) It was a dumb idea and we realized it early on and killed the investment. I’ve only been involved in one investment in this category personally although I’ve lived through a bunch like this over the years in the partnerships I’ve been in.
2) It was a decent idea but directionally incorrect, it was hugely overfunded, the burn rate was taken to levels way beyond reason, and it became impossible to adapt the business in a financially viable manner.

He goes on and talks about his most important lessen drawn fro these failures:

So it’s pretty clear to me that most venture backed investments don’t fail because the business plan was flawed. In my experience at least 2/3 of all business plans we back are flawed.

Most venture backed investments fail because the venture capital is used to scale the business before the correct business plan is discovered. That scale/burn rate becomes the cancer that kills the business.

There is so much truth in this. Most of us have had a “great” idea before, thinking this would change the world we are living in now. I know I have, many times. But the interesting thing about it  is that it really isn’t about the idea or the business plan that matters. It is about execution and discovery. Willing to let go of your initial idea’s and discovering what actually works. Setting up a successful  business is really an art. It takes great skill  and adaptation to become successful. While I write this, I’m listening to Michael Hedges in the background. Talking about skill, check out the way he masters his guitar.

One of my favorite books is “Good to great” written by Jim Collins.  In his book Jim explores why some companies are able to make the leap from being a good company to becoming a great company. One of the things I always remember about this book is the idea that great leaders first create a great team of people, before they figure out where the bus(-iness) is going. He goes on and describes 3 key characteristics of companies that made the leap, in a concept which he calls the hedgehog concept:

More precisely, a Hedgehog Concept is a simple, crystalline concept that flows from deep understanding about the intersection of the following three circles:

1. What you can be the best in the world at (and, equally important, what you cannot be the best in the world at). This discerning standard goes far beyond core competence. Just because you possess a core competence doesn’t necessarily mean you can be the best in the world at it. Conversely, what you can be the best at might not even be something in which you are currently engaged.

2. What drives your economic engine. All the good-to-great companies attained piercing insight into how to most effectively generate sustained and robust cash flow and profitability. In particular, they discovered the single denominator—profit per x—that had the greatest impact on their economics. (It would be cash flow per x in the social sector.)

3. What you are deeply passionate about. The good-to-great companies focused on those activities that ignited their passion. The idea here is not to stimulate passion but to discover what makes you passionate.

I was thinking about these things this morning, after a long weekend of Facebook backlashing. Mark Zuckerberg and his team are having a hard time at the moment, and a lot of bloggers are getting into the “after success comes the backlash” modus.  I wonder if Fred, who is not very hard on them, would consider investing in Facebook a success or failure. My guess is that it is a success, given the enormous growth and valuation of Facebook. But It might become a failure if Facebook isn’t able to turn the sentiment around.

Their main concern shouldn’t be the user walking away at this point. Their concern should be advertisers turning away. Advertisement is the main business driver for Facebook, and if companies like Coke are now “reconsidering” others might follow. And what to think of the questions Dana Boyd asks herself in “who clicks on ads and what might this mean“. In her post she writes about a study done by Global Advertisement Strategy:

What did we learn? A lot. We learned that most people do not click on ads, and those that do are by no means representative of Web users at large.

Ninety-nine percent of Web users do not click on ads on a monthly basis. Of the 1% that do, most only click once a month. Less than two tenths of one percent click more often. That tiny percentage makes up the vast majority of banner ad clicks.

Who are these “heavy clickers”? They are predominantly female, indexing at a rate almost double the male population. They are older. They are predominantly Midwesterners, with some concentrations in Mid-Atlantic States and in New England. What kinds of content do they like to view when they are on the Web? Not surprisingly, they look at sweepstakes far more than any other kind of content. Yes, these are the same people that tend to open direct mail and love to talk to telemarketers.

What does all of this mean? It means that while clickers may be valuable audiences, they are by no means representative of the Web at large. Focusing campaigns to optimize on clicks means skewing campaigns to optimize on middle-aged women from the Midwest. If these folks are not your target, then you should be ignoring the click-rate and looking deeper, to what audience your impressions are being delivered, and what audiences are converting (there is a large body of evidence that shows that click-rates and conversion rates rarely correlate with each other).

If your business model is about advertisement and click throughs, then you better figure out a way to extend this to other populations than just middle-aged women from the Midwest.

I have always felt that the metric itself is becoming less useful. With all of these things in mind I wonder if Facebook has the strength to work on their own hedgehog concept. They are already a good company. Few have seen such an incredible growth rate in such short time. But the question to be answered is, will they become a great company? I think they have a lot of great things in place. An incredible user base, application API’s, great people on board. And there is a huge advertisement market in place, where unfortunately Google right now takes up 75% of all ad revenues. All they need to do is figure out where to take their bus. If SocialAds and Beacon aren’t it, they better figure out what it should be. I vote for opening up their platform and resetting the balance between user value and advertiser value. That is really what their business should be about. It’s a balancing act.